Keeping Your Balance: IRS issues much anticipated regulations

By James W. Rahmlow
Posted: 6:22 pm Thu, January 26, 2012

James W. Rahmlow

Much anticipated regs issued for capitalization vs. expensing — (IR-2011-126)

In December of 2011, the IRS finally issued its regulations on the capitalization and expensing of tangible property. These current regulations have the distinction of being “temporary,” meaning they can be relied upon for expenditures made in tax years beginning on or after Jan. 1, 2012, and that the regs are binding on both taxpayers and the government.

An interesting part of the regulations is the definition of “unit of property” being a very important consideration in the determination of the treatment as capital versus the treatment as expense. For example, on a truck, while the motor might be a stand alone asset in certain situations, as it relates to a truck, the motor is a component of the entire unit of production (the truck).

Thus, if repairs are made to the motor in the truck and it extends the life of the truck (the “Unit”), then the repairs would be capitalized. This definition will have far reaching consequences in the way that certain industries have historically done business. While the unit of production method would seem particularly advantageous as it relates to a building and its structural components, the IRS anticipated many abuses and inconsistencies with case law and the normal treatment by taxpayers.

As such, the 2011 regulations require that improvements to building structures now be considered in light of eight specifically defined business components: 1) the heating, ventilation and air conditioning systems; 2) the plumbing systems; 3) the electrical systems; 4) all escalators; 5) all elevators; 6) the fire protection and alarm systems; 7) the security systems; the gas distribution systems; and 9) any other systems identified in published guidance.

 

There actually was a savings

Last year, the IRS announced that it would no longer mail tax packages with individual tax forms to taxpayers. Citing the cost of the paper filings, as well as the fact that so many taxpayers now file electronically, the decision made for 2010 will be continued for the 2011 filing season.

When initially implemented, the IRS said that the savings to taxpayers would be $26 million. While that amount was a little inflated, the Treasury Inspector General for Tax Administration recently reviewed the process and determined that the actual savings was just slightly over $14 million. Certainly this was not a small victory.

Get a chance to visit the man behind the curtain

As part of a pilot project to allow taxpayers to communicate directly with IRS representatives, a program has been designed to use two-way video conferencing to assist taxpayers with questions. While the program is only in select locations nationwide, hopefully questions will be answered in a timely fashion.

The closest IRS office that will be involved in the pilot program is in Utica, with additional setups available in Jonesboro, Ark.; Fresno, Calif.; Laguna Niguel, Calif.; Colorado Springs, Colo.; Miami, Fla., Harrisburg, Pa.; Richmond, Va.; Bridgeport, W.Va.; and Rothschild, Wisc. The program may be expanded to additional locations in the future, depending upon its success.

Applicable federal rates for February 2012

In a recent revenue ruling, the IRS issued its Applicable Federal Rates and Adjusted Applicable Federal Rates for February, 2012. Below is a summary of those rates:

	Applicable AFR	Adjusted AFR
Short-term	0.19%	0.35%
Mid-term	1.12%	1.24%
Long-term	2.55%	3.21%

Cents-per-mile and fleet-average amounts — (Rev. Proc. 2012-13)

As it annually does, the IRS has released the maximum fair market value (FMV) amounts of both autos and trucks for taxpayers wishing to use the cents per mile valuation as well as the maximum amounts for taxpayers wishing to use the fleet-average method.

For taxpayers wishing to use the 2012, 55.5 cents-per-mile methodology, the maximum FMV amount for passenger automobiles is $15,900 and $16,700 for trucks or vans, including passenger automobiles such as mini-vans and sport utility vehicles which are built on a truck chassis.

For taxpayers maintaining a vehicle fleet of at least 20 automobiles, a FMV value is equal to the average value of the entire fleet with a maximum FMV of $21,100 for passenger automobiles and $21,900 for a truck or van. If the value of any vehicle in the fleet exceeds the maximum, the fleet-average valuation method cannot be used.

Taxpayer audit statistics

At a recent news conference, the IRS announced its audit coverage statistics for 2011. For individuals, the overall audit rate was 1.11 percent, consistent with 2010. However, within that group, the rate varied markedly. For taxpayers with income under $200,000, the rate was 1.02 percent (down from 1.04 percent in 2010). For taxpayers in the $200,000 to $999,999 income range, the rate rose to 3.93 percent (up from 3.10 percent in 2010). For those over $1,000,000 in income, the rate increased almost 50 percent from 8.36 percent in 2010 to 12.48 percent in 2011.

For C corporations, the rate ranged from a low of 1.02 percent in 2011 to a high of 27.6 percent for corporations with assets of $250 million or more. For partnerships the coverage rate was a low 0.40 percent and for S corporations, the coverage rate was a similarly low 0.42 percent.

The threats are working

The Treasury Department has reported that the reporting by taxpayers of foreign bank accounts with balances in excess of $10,000 has drastically increased. The issue has been pursued by the IRS as they seek to obtain information about offshore and possibly previously concealed accounts. The report that is used to report the accounts is Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. In fiscal 2009, the number of FBARs filed was 276,386. The total reported for fiscal 2011 increased over 200 percent to 618,134. Look for a continued increase as taxpayers look to escape the penalties for nonfiling.

James W. Rahmlow, CPA, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at jrahmlow@mmb-co.com.